The feeling of something falling is always negative unless we are talking about falling in love.
So, there is something falling in the economy and all eyes are on it.
Guess what, the rupee value is falling!
But then, what does that even mean?
A currency is always valued against another currency. Therefore, rupee depreciation means that the value of the rupee has fallen in terms of dollars. Similarly, when the rupee value becomes stronger, its value appreciates in terms of dollars. This is called the appreciation of the rupee.
At present, the value of one dollar is equal to Rs.77.81 (on June 10, 2022). One of the key factors resulting in this depreciation is the ongoing war between Ukraine and Russia.
We call it depreciation because the rupee value has fallen from Rs.73.1 per one dollar (on June 10, 2022).
Changes in a currency value and the impact on the economy
No country is self-sufficient in terms of resources. To compensate for the economic shortage, countries must import goods and services from other countries.
For this trade, the countries either have to pay the exporting country in terms of their own currency or in terms of US Dollars.
Therefore, if the home currency (Rupee for India) depreciates, they will have to shell out an extra amount to make the payments for imports.
A few commonly imported items by India are coal, fuel, foodgrains etc.
Fortunately, not everything is bad about rupee depreciation. There are a few positives that an economy can count on.
In this blog, we will analyse the positive as well as the negative aspects of rupee depreciation:
Let us first talk about the positives of rupee depreciation.
The Positive Side of Rupee Depreciation
Why is rupee depreciation considered a tailwind for the Indian Information Technology sector?
The Indian IT sector focuses heavily on exports. With the depreciation of the value of the rupee, it has become inexpensive for the international buyers. Therefore, they can achieve more revenue from their global clients.
Furthermore, due to covid, the offshoring of overseas businesses to India has increased. Offshoring of international business means outsourcing of a part or the complete business operations.
Therefore, with the decline of the rupee value, the revenues of IT companies witness a spike.
Despite the contagion effect of the global crisis, engineering exports witnessed a rise of 7.84 per cent in March 2022. The reduction in supply chain expenses due to the reduction of export duties on fuel was instrumental in this rise.
With the depreciation of the rupee, the cost of acquiring property by foreign investors and NRIs becomes cheaper and purchases by these parties increases. This increased purchase is observed more in the premium and luxury housing segment. Therefore, the business for this segment also increases.
India is one of the top producers of crude steel in the world. The Indian steel industry is also highly export-oriented. With the depreciation of the rupee, these businesses particularly have increased revenues.
Stocks in focus are TATA Steel, NALCO, and JSW steel, whose stocks have boomed in April 2022 with the rise in dollar value strength.
The Negative Side of Rupee Depreciation
Rupee depreciation has more negatives than positives with respect to its economic impact.
Fuel is usually imported and exported raw or in the form of crude. The cost per barrel of fuel is generally measured in terms of US dollars. Therefore, if the rupee depreciates, the importers will have to pay more for every dollar to be paid.
This makes buying fuel expensive.
The supply chain hugely depends on fuel. With the rise in fuel prices, the supply chain cost for businesses rises. Therefore, the revenue of these companies considerably decline.
Companies tend to shift this cost to the consumers by raising the prices for the buyers. Thus, consumers like you and I have to pay more for buying the same things than before.
With the rise in prices of goods and services, consumers’ savings reduce. Also, due to the reduction in business, the companies tend to cut down on the workforce to reduce their costs.
With the increasing job loss and rising inflation, the rupee depreciation, though indirectly impacts our pockets and lifestyle significantly. This brings negative investor sentiment to the stock market.
Businesses like Jubliant foods (popular brand Dominos India) and Page Industries (popular brand Jockey India) who hold franchises of international companies also have to pay their royalties in terms of US dollars.
Therefore, a decline in the value of the rupee results in these businesses paying more in terms of rupee for each dollar paid.
Many businesses in India are heavily dependent on raw materials imported from other countries. Notable industries include the chemical and automobile industries. With the decline in the value of the rupee, the imports of raw materials become dearer. This leads to a rise in the cost of production. To shift this cost, the prices of the semi-ready and ready products rise. Therefore, the end consumer finds it expensive to purchase these ready products.
This leads to a fall in demand for these products, which results in a fall in the profits of these businesses.
For any economy, it is crucial to focus on the balance of trade. The balance of trade = the total market value of the exports - (minus) the total market value of their imports.
When the rupee depreciates, the value of imports becomes higher than the value of exports. This leads to the Current Account Deficit (CAD). With the worsening of the balance of trade, the dollar value gains strength, and the rupee value stands the risk of further depreciation.
As per the latest data, India’s trade deficit has widened to $23.33 billion (as of May 2022). Last year, during the same period, this gap was around $6.53 billion.
Closing the Account
Economists have suggested that rupee depreciation can be a temporary phenomenon. However, the possible end of the war and the reversal of uncertainty in the international markets can only reduce the pressure on the Indian rupee.
The depreciation of the rupee is primarily due to the contagion effect of the global economic headwinds. It has impacted domestic businesses by increasing their supply chain costs and reducing their revenues and demand. It has also affected the end consumers like us with rising inflation and the possibility of a recession.